Pulse Survey Q4 2022: Europe
UK faces infrastructure headwinds as investors target green opportunities
- Q4 2022 Pulse report from Global Infrastructure Investor Association (GIIA) and Alvarez & Marsal shows UK switching from most to least attractive Western European investment destination between Spring and Autumn of this year
- Fall in deal activity expected as energy crisis, rising inflation, higher borrowing costs and ongoing supply chain disruption weigh on plans
- Investors double down on net zero commitments as COP27 gets underway
The world’s largest infrastructure funds are looking to the new Prime Minister Rishi Sunak to restore investor confidence amid a drop in appetite for investment in UK projects.
GIIA’s latest Infrastructure Pulse report, in which investors rank the attractiveness of locations on a scale of +5 to -5, shows the UK with an average score of +0.11, down more than two points on last quarter when it was viewed as the most appealing prospect in Western Europe.
The Nordics (+2.18) have claimed that title in Q4, closely followed by the DACH region, covering Germany, Switzerland and Austria (2.04). Negative readings were recorded across Greece and Eastern European nations as the Ukraine conflict continues.
No European destination could match the +2.59 posted for the US, where the Infrastructure Investment and Jobs Act as well as the Inflation Reduction Act have spurred a raft of activity.
More widely, investors report a challenging fundraising environment, with sentiment towards equity raising down more than a point on last quarter to +0.85. Sentiment around debt-raising has dropped even further, falling more than three points to -0.03, the first negative reading in the survey’s history.
Respondents largely state that they are focussed on investment rather than fundraising or disposals. The amount of dry powder that global infrastructure investors hold is estimated to have quadrupled to just shy of $300bn in the ten years to 2021.
Asked to rank the severity of challenges affecting existing European portfolios on a scale of 1-5, respondents put the energy crisis (3.68), inflation (3.50) and supply chain disruption (2.82) top of the list. For assessing new opportunities, inflationary pressure is the biggest concern (3.71).
Despite the challenges faced, investors are doubling down on investments aimed at connecting communities and achieving net zero as COP27 gets underway: communications as well as emerging sustainable tech, such as battery storage, are ranked as the most appealing prospects by sector (at +2.89 and +2.57 respectively) alongside last mile utilities (+1.71).
Close to three quarters (71%) of respondents are pledging to invest $500m or more to achieve net zero carbon emissions across their European portfolios over the next five years. One in seven (15%) expect to deploy $5bn or more to green projects.
Reforming the regulatory environment (3.71) and widening climate friendly incentives (3.55) are seen as the most effective routes to spurring net zero investments by investors.
GIIA CEO Lawrence Slade said: “As the COP27 summit gets underway, infrastructure investors are reiterating commitments to net zero targets despite myriad challenges faced.
“Against a backdrop of rising prices and higher debt costs, it’s concerning that regulatory frameworks, taxation and lack of project pipelines are also being flagged as barriers to invest. If we’re serious about climate targets, we have to look at where reform is possible.
“The dry powder is there. Now we need the certainty and incentives that can mobilise the trillions of dollars required to achieve net zero.”
Alvarez & Marsal Managing Director and Head of U.K. Energy & Infrastructure Transaction Advisory Group Wayne Jephson said: “With the survey being conducted at the height of the UKs recent political turmoil, it is not surprising that sentiment towards the UK Infrastructure sector is at its lowest point since Q2-20.
“Whilst there are signs that some semblance of political stability is returning following Rishi Sunak’s election as the new Prime Minister, there remains an increasing concern over the direction of existing UK regulation and regulatory support for new asset classes which, when coupled with rising interest rates, has offset the benefits of inflationary protection afforded by regulated assets.
“Dry powder is at historical highs and respondents suggest that, whilst activity in 2023 may be below the 2021/22 highs, there remains significant appetite for energy transition, digital and renewable platforms.”